Although my term life insurance policies are level premium policies (same premium due every year of the term) there are advantages to a non-level premium policy. An annually renewable term (ART) policy is one where the premium goes up each year of the policy. Although that makes later years very expensive compared to the first few years, it offers an advantage in that you have more money available early in your career to pay off loans and invest. For super savers, it also gives you the opportunity to drop the policy when you reach financial independence, potentially saving a large percentage of the total premiums you would pay by purchasing and then cancelling a level premium policy early. However, some agents are skeptical that ART is actually less expensive than a level premium policy, so I thought it would be useful to run the numbers.
Daniel Wrenne, a financial planner and advertiser on the site, provided me an annually renewable term policy from AXA, which was the least expensive one he could find. We ran the numbers using a healthy, non-smoking 30 year old male in Kentucky and a $1 Million policy. Now, bear in mind that while the company cannot cancel your policy on you, they can increase the premiums by more than the schedule shows. So you have to look at both the projected premiums and the guaranteed premiums. The good news is that, reportedly, AXA has only increased premiums above the schedule one time in the past. We will compare to the least expensive level 10, level 20, and level 30 policies I could find.
Year | ART Sched. | Total | ART Guar. | Total | Level 10 | Total | Level 20 | Total | Level 30 | Total |
1 | 300 | 300 | 300 | 300 | 235 | 235 | 413 | 413 | 685 | 685 |
2 | 325 | 625 | 325 | 625 | 235 | 470 | 413 | 826 | 685 | 1370 |
3 | 325 | 950 | 325 | 950 | 235 | 705 | 413 | 1239 | 685 | 2055 |
4 | 325 | 1275 | 2935 | 3885 | 235 | 940 | 413 | 1652 | 685 | 2740 |
5 | 325 | 1600 | 2995 | 6880 | 235 | 1175 | 413 | 2065 | 685 | 3425 |
6 | 335 | 1935 | 3075 | 9955 | 235 | 1410 | 413 | 2478 | 685 | 4110 |
7 | 335 | 2270 | 3165 | 13120 | 235 | 1645 | 413 | 2891 | 685 | 4795 |
8 | 365 | 2635 | 3255 | 16375 | 235 | 1880 | 413 | 3304 | 685 | 5480 |
9 | 375 | 3010 | 3345 | 19720 | 235 | 2115 | 413 | 3717 | 685 | 6165 |
10 | 395 | 3405 | 3405 | 23125 | 235 | 2350 | 413 | 4130 | 685 | 6850 |
11 | 425 | 3830 | 3615 | 26740 | 413 | 4543 | 685 | 7535 | ||
12 | 475 | 4305 | 3915 | 30655 | 413 | 4956 | 685 | 8220 | ||
13 | 515 | 4820 | 4185 | 34840 | 413 | 5369 | 685 | 8905 | ||
14 | 545 | 5365 | 4515 | 39355 | 413 | 5782 | 685 | 9590 | ||
15 | 575 | 5940 | 4875 | 44230 | 413 | 6195 | 685 | 10275 | ||
16 | 605 | 6545 | 5205 | 49435 | 413 | 6608 | 685 | 10960 | ||
17 | 635 | 7180 | 5535 | 54970 | 413 | 7021 | 685 | 11645 | ||
18 | 675 | 7855 | 5925 | 60895 | 413 | 7434 | 685 | 12330 | ||
19 | 725 | 8580 | 6405 | 67300 | 413 | 7847 | 685 | 13015 | ||
20 | 775 | 9355 | 6975 | 74275 | 413 | 8260 | 685 | 13700 | ||
21 | 895 | 10250 | 7515 | 81790 | 685 | 14385 | ||||
22 | 975 | 11225 | 7965 | 89755 | 685 | 15070 | ||||
23 | 1075 | 12300 | 8445 | 98200 | 685 | 15755 | ||||
24 | 1125 | 13425 | 8955 | 107155 | 685 | 16440 | ||||
25 | 1195 | 14620 | 9525 | 116680 | 685 | 17125 | ||||
26 | 1325 | 15945 | 10125 | 126805 | 685 | 17810 | ||||
27 | 1595 | 17540 | 11025 | 137830 | 685 | 18495 | ||||
28 | 1675 | 19215 | 11925 | 149755 | 685 | 19180 | ||||
29 | 1825 | 21040 | 12945 | 162700 | 685 | 19865 | ||||
30 | 1895 | 22935 | 14025 | 176725 | 685 | 20550 | ||||
Sorry the table isn't prettier.
Now, while you're enjoying number overload, let's try breaking this down. The first column is the year of the policy, it goes from 1 to 30. The next column is the scheduled column for an ART policy, with the third column being the total premiums paid to that point in the policy. You can compare this to the next two columns, for the guaranteed premiums in the policy. As you can clearly see, nothing is keeping the insurance company from raising the premiums through the roof right away. No guarantee there. That's the first downside of using an ART policy.

Speaking of Crazy- This is the Golden Stair pitch of the Grand Teton
But, if for some crazy reason they raise the rates dramatically (and they have to do it for everyone in your insured class, not just you), as long as you're insurable, no big deal. You just go buy another policy from another company. Combine that with the fact that raising rates significantly is very unlikely, and I feel pretty good just using the scheduled premiums for the rest of our comparisons. If you want the guarantee, get a level premium policy.
ART vs 10 Year Level
Now, let's compare ART to a ten year policy. As you can see, the ART has higher rates than the ten year policy starting in year 1. So if you really only want a policy for a few years (i.e. 10 or less) there's no sense in buying an ART policy. Just go get a 10 year level premium. It doesn't make sense, but that's apparently the way it is.
ART vs 20 Year
Next, we'll compare ART to a twenty year policy. As you can see, the ART has higher rates starting in year 11. However, the cumulative premiums paid become equal in year 17. By year 20, you will have paid an extra $1,095 for the ART policy.
ART vs 30 Year
Now for the 30 year, which is what most people would recommend for a 30 year old. The ART rates become higher than the level rates in year 19. The cumulative total for the ART doesn't become higher until year 28, and even if you keep it a full 30 years, you're only going to pay an extra $2,385.
Bottom line for this particular person seeking insurance: if you're going to cancel your policy in 17 years or less, better to buy an ART than a level 20 policy. If you're going to cancel in 28 years or less, better to buy an ART than a level 30 policy.
The Time Value of Money
But wait, there's more. We haven't taken into consideration the time value of money. Money in year 28 simply isn't worth as much as money in year 1. If we assume this particular person actually invested the difference, and earned 5% on it, how much better off would he be than if he had bought the level premium policy?
Comparing the ART to the 20 year policy, after 10 years when the premiums for the ART policy finally become larger than the level policy, the ART dude has an extra $1633 sitting around to help pay them. This has the basic effect of pushing the break-even point out from year 17 to year 19.
It gets even better when comparing with the 30 year policy. After 17 years when the ART premiums become larger, ART dude has over $14K sitting around. In fact, after 30 years, assuming all that money saved was earning 5% the whole time, he still has an extra $6K for his efforts.
Pure Insurance
I find that result kind of exciting. I see annually renewable term as more of a “pure” insurance than a level premium policy. You use it until you hit financial independence, then you cancel it. What it costs you is what it costs you. While some people might be pushed to cancel their policy earlier than they should due to the rapidly climbing premiums, others will use that escalating premium to motivate them to save more, trim expenses more and invest smarter. I don't necessarily see behavioral issues (because personal finance is both finance-i.e. math and personal- i.e. behavior) working better for either policy. You do lose the guaranteed premiums. But as we've seen time and time again with various insurance products, guarantees aren't free and they rarely come cheap. Only transfer the risk you absolutely need to and, with discipline, you're likely to come out ahead financially.
Your Mileage May Vary
So what should you do? Well, I suggest that if you want to consider this non-conventional approach that you make a table such as the one above using the actual policies a good independent life insurance agent generates for you. Project when you expect to be financially independent. Then compare the ART policy to a level term policy of appropriate length. I won't be buying an ART because I already own level premium policies bought years ago and will reach financial independence in less than 1 years. But I kind of wish I had at least considered them when I purchased my policies. I might have chosen not to pay for the guarantees of a level premium policy.
What do you think? Do you own an ART policy? Why or why not? Did you consider one? If you are an insurance agent or financial planner, what would it take for you to recommend one to your client? Comment below!
Great post. Two questions.
1). Same principle for disability insurance? Or does an annual renewable policy work different in the DI world. I vaguely remember the Berkshire-Guardian agent trying to talk me into one and passing for a level premium as I figured she was probably just trying to rip me off.
2). Is it possible to convert a level term policy to an ART with same company with or without a medical exam if still early in and not close to FI?
1) Guardian DI: I couldn’t get it to work for Guardian DI. In order for me to be better off for renewable rate Guardian DI, I had to assume a ridiculous high discount rate of 7 to 8% or cancel the policy in the late 40s. So I applied for a level rate Guardian DI policy.
2) I am not aware of any insurance companies that allow you to do that. The best convertibility for term policies that I know of is for 20 years.
Would be interesting to see how favorable #s with single ART are vs:
1) stacked level term policies of 15 and 30 yrs
2) stacked 10-15 yr and ART 30 yr policies with goal of dropping by after 25 yrs or less.
Sorry – late to the party. I was thinking along those same lines and ran the #’s for ART vs layering and reducing each over time as you build wealth. My conclusion in the scenarios I looked at was #1 – being proactive and reducing over time saves a ton of money no matter how you structure it. #2 – the cost of ART vs layered term was surprisingly very similar. ART runs the risk of unexpected increase in cost, while with Level term you run the risk of your needs lasting longer than you expect and losing coverage early. I lean toward layering term for the more predictable situation and ART for the unpredictable. You can see more here – http://wrennefinancial.com/comparing-term-life-insurance-strategies-physicians/
This was a worthwhile post, since I learned about a type of policy I wasn’t very familiar with, but there’s no way I could recommend such a policy. Guaranteed but non-level premiums are worth considering for life and disability, as long as the rates are knowable and guaranteed in advance. But if I understand this policy correctly, there’s no guarantee these rates won’t rise , even if they haven’t gone up to the limit in the past .
If it’s anything like the expected vs guaranteed returns on whole life, then the only numbers that can be relied upon are the guaranteed numbers. If that’s the case, traditional term will win hands down.
Anyone may become un-insurable at any time. Given that it’s insurance, and I’m buying it for the guarantee, then I want to make sure that I have a guarantee, and not a promise that my rates will be the same unless the company chooses to raise them. Otherwise, there’s no point.
I did this for my first disability policy. I knew I would be changing specialties and just needed something to cover a catastrophic issue for the next few years. Once I finished school I got a new policy, level, and was good to go.
As far the chance of them increasing it, I bet it’s more likely you collect on it than they increase it. Increasing the rates means they have to go to the state insurance board, get the approval and then do it for everyone in that class. It’s just easier to make a new class for all the new policies. In addition, if they increase the rates, then to only ones to stay on the policy are the ones who can’t get another cheaper one, which is much worse for the insurance company than just not raising the rates in the first place.
If I could go back I would have looked at this more, I did a laddered term, but this would have been better I’m guessing as I doubt I’ll carry the insurance even to 20 years, let alone 30.
One question: Do annually renewable require a physical/blood test each year? If so, there is no way that I would recommend it as the way to go. (It is easier to get the “preferred plus” healthy rates one time versus each year… and it wasn’t necessarily easy for me that one time).
If that is not required, then I would have considered it…but I don’t plan on needing life insurance another 10 years.
No. One exam is all. You’re not buying a separate policy every year.
No. There are no exam, blood tests, urine tests or medical questions asked once the policy is inforce. I just don’t see how ART makes any sense when level premium term exists and the premium rates are guaranteed.
It is often sold by agents when one wants to convert to Whole Life or another form of permanent insurance shortly after the purchase but that is really about it and, possibly, to cover a short term loan.
Just looking at the break even points, I find it very difficult to justify the cost savings it offers, if any, relative to the risk.
I agree that the savings must be worth the additional risk. It’s tricky to get all the info on what ART options there are out there, but the point of this post is that it is worth looking at. If the premiums are much less (like in the example in this post) then go for it. If they’re about the same, might as well take the guaranteed level premiums.
ART premiums while not “guaranteed” seem pretty close to it. As stated in the article, I believe they can only raise rates for you if they do the to all others in class, not individually if you become expensive to insure. When I last looked into it, I also found that premiums had not increased over the published schedule. Of course do your own due diligence. For those highly likely to drop coverage when reach FI, seems a no brainer to me.
If the lack of a “100%” guarantee against further premium increase still scares you stack it with a 10-15 yr level term policy.
Similar to the solid gamble many of us take with variable mortgages in my mind.
For those looking at an ART policy, SBLI of Massachusetts might have the cheapest. You can request a quote directly from SBLI of Mass. Agents won’t show it to you for two reasons: commissions is low due to low first year premiums and the product does not show up in term4sale software. When I did the comparison between SBLI of Mass ART and level term life, SBLI of Mass ART was cheaper than level 20 and level 30. SBLI of Mass ART was about 30% cheaper based on undiscounted cashflows with 65% in savings during the first 15 years. The savings would be much higher once you factor in time value of money or early cancellation of insurance. By using an ART, it is a true “buy term and invest the difference.”
The insurance company has to seek regulatory approval to raise rates on ART. This isn’t common knowledge: term 30 is very overpriced due to regulatory reserves that insurance companies have hold. If you want to save money, avoid term 30 if possible and choose an ART or Protective Choice Term UL Term 20, the latter that allows you to keep the policy pass year 20 at a reasonable price. In terms of guarantee, car, rental, home, and umbrella policies have no level premium guarantee, but you would still buy those policies and premiums would change based on insurance company claim experience and regulatory approval.
Those aren’t really comparable to term. If my car insurance jacks up then I can easily switch. With life insurance getting the chances of getting best rates goes down over time.
Rex: For car insurance, if you had an accident or made claims, other car insurance companies will not offer you the best rates when you switch.
Also the cost insurance of inside whole life and cash value universal life insurance isn’t guaranteed, just like an ART. The way that insurance companies and regulator price life insurance is that life insurance is significantly overpriced. This protect the insurance companies and the reinsurance companies. Some whole life and universal life policies have mechanisms in which the insurance company would return some of the overpriced cost of insurance to the insured. Most term policies do not do that.
If you have to have a guarantee and you are looking at Term 30, take another look Protective Choice Term UL Term 20. This product allows you to keep the term life policy past 20 years at the same premium, but coverage declines after year 20. This way, you overpay less on the initial premiums, but you can still have some coverage until year 30 and beyond. Also you wouldn’t have wasted money if you cancel year 21 or after. This strategy is similar to using the ART, but you get a level premium guarantee when the policy is in force.
That’s still not the same thing. Several life insurance companies recently increased cost of insurance on in force ULs even though mortality is better than when the products were purchased. Those buyers are out of luck even without the “car accident “. Also a player in the term on UL chassis, Genworth, closed down its life and annuity division so that may not work out tremendously. One doesn’t really transfer risk with insurance. It’s more like taking on the risks of the assumptions the insurance company has projected. Some things they are good at and some not. The bottom line is that there isn’t a free lunch with ART vs 30 term. The big take always are don’t buy permanent insurance, buy term for a period a few years longer than what you project. If that’s over 20 then you could consider ART or a term UL product but understand the risk.
Rex: We are on the same page. I am aware the cost of insurance pricing can be dependent on projected investment return if the insurance company uses a shadow account methodology and investment returns have dropped significantly during the past decade.
Genworth has a lot of troubles over its mortgage insurance and long term care divisions. I would not buy a life insurance or annuity product from them due to the financial weakness in the holding company. I am not aware that Genworth had any difficulties in its life insurance division.
What risk do you see with Protective Choice Term UL since it actually has a level premium guarantee? Is there a risk with using a term on UL chassis over true term?
It’s an unknown. obviously the term UL wasn’t projected to do well enough for them to keep selling it. Of course one can claim they wanted to focus on other things or give other excuses but in the end Genworth stopped selling it and there doesn’t appear to be a rush of others to start. I wouldn’t have a problem with the protective product but I think it’s naive to assume no possibility of issues and thus one should consider that.
I found out that Lincoln Financial Group used to have a term UL product as well. I am not sure why Lincoln Financial ended the term UL since Lincoln Financial is a strong company. I think Genworth closed its life and annuity division due to the weak branding of Genworth.
My understanding that term life in all its forms is a very profitable product. I am still not able to uncover any unique issues that Protective will face with its term UL product over term, GUL, or UL with secondary guarantee. Also Protective Life is owned by the third largest insurance company in Japan. I am not concerned about the viability of Protective Life.
Well you might want to review what happened to insurance companies in Japan during prolonged low interest rates.
You should also realize there is very likely a reason why few sell term UL. You seem to want to believe there is no reason.
Rex: I have researched extensively about low interest rate in Japan and its impact on the Japanese insurance companies. My understanding is that the Japanese insurance companies collapsed due to guaranteed high interest rates like 4% in cash value policies while the insurance company itself only earned 1% to 2% in the general account. Some companies like Protective and Banner that specialize in term like products have the least impact from low interest rates: term policies will either end or lapse and are not dependent on high interest rates.
Introducing a new product is expensive and time consuming process for any regulated entity. Unless term UL takes the market by the storm, the insurance company has little to no incentive to introduce a term UL product in addition to term. The average customer has no idea about the difference between term And term UL. Also It is easier to adjust the pricing on existing products than introduce new ones. Also Protective is betting its entire term market share on its term UL product.
You are adamant about finding something negative about term UL product and I did find one for you. One cannot changed the death benefit for Protective term UL until year 3. Most term products allows you to change the death benefit amount right away. You have to agree that this is minor drawback for Protective term UL.
First off, as i mentioned i wouldnt personally have a problem purchasing that product. I just would realize the limitations. 2nd yes i dont think its a big deal about changing the death benefit right off the bat.
However, term products and their pricing can be affected by the low interest rate environment. Insurance companies in Japan got into trouble because they couldnt meet their guarantees. This happens when the assumptions are very wrong. One assumption is the return on your investment piece and this also happens with term. Now with regular term, the reserve requirements are higher than term UL if im not mistaken. This is likely why some companies considering going into it since that can be a tremendous advantage (if things go the way the insurance company wants and expects) and much different then adjusting pricing on their regular term products already in service. We actually have already seen some of this happen with a similar situation which would be no lapse gUL which in essence has zero cash value and thus term for life. Several companies have repriced their no lapse gUL bc of the low interest rate environment and some people worry if this will be the next black eye for the insurance industry. I suspect if we were in a high interest rate environment that more companies would have plunged into term UL but thats just a guess.